Cost principle

Definition

The cost principle is an accounting concept that requires assets to be recorded at their original purchase cost. This historical cost remains on the financial statements and does not adjust for market value changes over time.

5 Must Know Facts For Your Next Test

1. The cost principle ensures consistency and reliability in financial reporting.
2. It applies to all asset purchases, including equipment, buildings, and land.
3. Adjustments for depreciation are made based on the original cost, not current market value.
4. The principle helps prevent manipulation of asset values on financial statements.
5. It can lead to discrepancies between book value and market value over time.

Review Questions

Related terms

Historical Cost:

The original monetary value of an asset at the time of purchase.

Depreciation:

The process of allocating the cost of a tangible asset over its useful life.

Fair Value:

An estimate of the price at which an asset would trade in a competitive auction setting.